37790 Federal Register / Vol. 63, No. 134 /Tuesday, July 14, 1998 /Rules and Regulations

FEDERAL COMMUNICATIONS

COMMISSION

47 CFR Part 76

[MM Docket No. 92–264; FCC 98–138]

Horizontal Ownership Limits

AGENCY: Federal Communications

Commission.

ACTION: Final rule; announcement of

effective date.

SUMMARY: In the Second Memorandum

Opinion and Order on Reconsideration

(Second Order on Reconsideration), the

Commission maintains the current 30%

cable television horizontal ownership

limit and generally denies the motion to

lift the voluntary stay on enforcement of

that limit. However, the Commission

lifts the stay and announces the

effective date for information reporting

requirements. A companion Further

Notice of Proposed Rulemaking seeks

comment on possible revisions of the

horizontal ownership rules and the

method by which horizontal ownership

is calculated.

DATES: Section 76.503(c) published at 58

FR 60141 (November 15, 1993) is

effective August 13, 1998.

FOR FURTHER INFORMATION CONTACT: John

Norton, Cable Services Bureau, (202)

418–7200.

SUPPLEMENTARY INFORMATION: This is a

synopsis of the Commission’s Second

Order on Reconsideration, MM Docket

No. 98–138, adopted June 23, 1998, and

released June 26, 1998. The full text of

this decision is available for inspection

and copying during normal business

hours in the FCC Reference Center

(Room 239), 1919 M Street, NW,

Washington, D.C. 20554, and may be

purchased from the Commission’s copy

contractor, International Transcription

Service, (202) 857–3800, 1231 20th

Street, NW, Washington, D.C. 20036.

Synopsis of the Second Order on

Reconsideration

1. This Second Order on

Reconsideration addresses petitions for

reconsideration of the Second Report

and Order in MM Docket No. 92–264, 58

FR 60135, November 15, 1993 (‘‘Second

Report and Order’’). Among other

things, the Second Report and Order

promulgated rules pursuant to section

613 of the Communications Act (47

U.S.C. § 533(f)(1)(A)), which requires

the Commission to ‘‘prescribe rules and

regulations establishing reasonable

limits on the number of cable

subscribers a person is authorized to

reach through cable systems owned by

such a person, or in which such a

person has an attributable interest’’

(‘‘horizontal ownership rules’’). Section

613(f)(2) directs that, in addition to

other public interest concerns, the

Commission must consider and balance

seven particular public interest

objectives in establishing the horizontal

ownership rules: (1) To ensure that no

cable operator or group of cable

operators can unfairly impede the flow

of video programming from the

programmer to the consumer; (2) to

ensure that cable operators do not favor

affiliated video programmers in

determining carriage and do not

unreasonably restrict the flow of video

programming of affiliated video

programmers to other video distributors;

(3) to take account of the market

structure, ownership patterns, and other

relationships of the cable industry,

including the market power of the local

franchise, joint ownership of cable

systems and video programmers, and

the various types of non-equity

controlling interests; (4) to take into

account any efficiencies and other

benefits that might be gained through

increased ownership or control; (5) to

make rules and regulations that reflect

the dynamic nature of the

communications marketplace; (6) to

impose no limitations that prevent cable

operators from serving previously

unserved rural areas; and (7) to impose

no limitations that will impair the

development of diverse and high quality

programming. The Commission’s

horizontal ownership rules established

in the Second Report and Order provide

that ‘‘no person or entity shall be

permitted to reach more than 30% of all

homes passed nationwide through cable

systems owned by such person or entity

or in which such person or entity holds

an attributable interest.’’

2. In the Second Report and Order,

the Commission voluntarily stayed the

effective date of the horizontal

ownership rules pending final judicial

resolution of the District Court decision

in Daniels Cablevision, Inc. v. United

States (835 F. Supp. 1, 10 (D.D.C. 1993),

aff’d in part, rev’d in part, Time Warner

Entertainment Co., L.P. v. FCC, 93 F.3d

957 (D.C. Cir. 1996)) which held that the

underlying statute violates the First

Amendment. The Daniels court stayed

further court proceedings, including

determination and imposition of relief

for the plaintiffs, pending appeal. On

December 15, 1993, petitions for

reconsideration of the stayed rules and

a motion to lift the administrative stay

were filed with the Commission. The

following month, the stayed rules were

challenged in Time arner Entertainment

Co., L.P. v. FCC (No. 94–1035 (D.C. Cir.

1994)). In August 1996, the D.C. Circuit

Court consolidated the Daniels appeal

regarding the facial validity of the

statute and the Time Warner challenge

to the Commission’s rules, and

determined to hold court proceedings in

abeyance while the Commission

reconsidered the horizontal ownership

rules (Time Warner Entertainment Co.,

L.P. v. FCC, 93 F.3d 957, 979–80 (D.C.

Cir. 1996)).

3. The Second Order on

Reconsideration disposes of both the

reconsideration petitions, which seek to

lower the 30% horizontal ownership

limit and revise the calculation factors,

and the motion to lift the voluntary stay

on enforcement of the horizontal

ownership rules. In the Second Order

on Reconsideration, the Commission

maintains the current 30% horizontal

ownership limit and denied the motion

to lift the voluntary stay on enforcement

of that limit. We note that, while the

most established programmers can

obtain favorable terms from even large

cable multiple system operators

(‘‘MSOs’’), the cable horizontal

ownership rules remain necessary to

prevent MSOs from exercising market

power against new, independent, and

less prominent programmers. In order to

facilitate monitoring of cable ownership

interests, the Commission lifts the

voluntary stay insofar as it applies to the

information reporting requirements of

47 CFR 76.503(c). Prior to acquiring

attributable interests in any additional

cable systems, a person holding an

attributable interest in cable systems

reaching 20% or more of homes passed

nationwide by cable will be required to

notify the Commission of the

incremental change the acquisition

makes in terms of the 30% of homes

passed standard, i.e. specifying the

ownership in terms of homes passed

before and after the acquisition is

complete.

4. The arguments raised against the

Commission’s 30% limit fall into five

broad categories—consideration of

diversity issues; alteration of the status

quo; divestiture by TeleCommunications, Inc. (‘‘TCI’’); current

levels of horizontal concentration; and

impact of other statutes and rules.

5. With respect to diversity of

ownership, the Second Report and

Order finds that the 30% horizontal

ownership limit provides considerable

protection for diversity concerns. As

required by section 613, the

Commission balances those diversity

concerns with many other public

interest factors, some of which support

the growth of cable MSOs. In the

Second Order on Reconsideration, the

Commission finds that it properly
Federal Register / Vol. 63, No. 134 /Tuesday, July 14, 1998 /Rules and Regulations 37791

concluded that a 30% limit is generally

appropriate to prevent the largest MSOs

from gaining excessive leverage, and

also ensures that the majority of MSOs

continue to expand and obtain the

economies of scale necessary to

encourage investment in new video

programming services and the

deployment of advanced cable

technologies.

6. In addition, petitioners contended

that Congress sought to change the

status quo in the 1992 Cable Act

because existing levels of horizontal

concentration were too high, and that

the 30% horizontal ownership limit is

too high because it does not alter the

status quo. In the Second Order on

Reconsideration, the Commission finds

that the statute does not direct the

Commission to alter the status quo by

ordering divestiture by any cable MSO.

Instead, Congress required that the

Commission set ‘‘reasonable limits’’ and

left the parameters of what ‘‘reasonable

limits’’ would be to Commission

discretion. The statute and the

legislative history make clear that the

Commission was not required to alter

current industry structure, but to

consider the potential public interest

concerns associated with the industry

structure. In the Second Order on

Reconsideration, the Commission finds

that it fully considered such interests.

7. Petitioners also asserted that the

Second Report and Order was too

concerned about avoiding divestiture by

TCI and was not focused on consumer

welfare. In the Second Order on

Reconsideration, the Commission finds

that inquiry into the impact divestiture

would have upon subscribers,

programmers and industry investment

are legitimate public interest objectives

that the Commission is entitled to

consider. We also noted that, in both

First Report and Further Notice and the

Second Report and Order, the

Commission considered arguments for

low limits that would require

divestiture. The Commission expressly

confronted the divestiture issue and

determined that, in the absence of

definitive evidence that existing levels

of ownership are sufficient to impede

the entry of new video programmers or

have an adverse effect on diversity,

existing arrangements should not be

disrupted. In the Second Order on

Reconsideration, we find that the

Commission properly considered

whether the substantial structural

change that divestiture would entail was

warranted. The Commission based its

final decision in the Second Report and

Order not solely on a determination to

avoid divestiture, as petitioners

suggested, but, more importantly, upon

the public interest requirements of

section 613.

8. With respect to current levels of

horizontal concentration, petitioners

asserted that the Second Report and

Order did not sufficiently address the

evidence that existing levels of

horizontal concentration are too high

and that TCI, the largest MSO, already

uses its market power to disadvantage

competing program services. All other

cable operators filing comments

strenuously opposed the argument that

current levels of horizontal

concentration are ‘‘too high’’ and cited

the benefits of horizontal concentration,

including MSOs’ ability to achieve

economies of scale in research and

development of transmission and

distribution technology, savings in

administrative costs such as billing

operations, advertising, marketing, and

management, and reduction in the costs

of negotiating with programmers.

9. The Commission found in the

Second Report and Order that 30% was

an appropriate horizontal ownership

limit ‘‘in the absence of definitive

evidence that existing levels of

ownership are sufficient to impede the

entry of new video programmers or have

an adverse affect on diversity . . .’’ The

Second Report and Order concluded

that a 30% limit was ‘‘appropriate to

prevent the nation’s largest MSOs from

gaining enhanced leverage from

increased horizontal concentration,’’

and is ‘‘reasonable to prevent the types

of anti-competitive conduct which

concerned Congress, particularly when

coupled with the behavioral restrictions

contained in [the program access and

program carriage provisions] * * *.’’ In

the Second Order on Reconsideration,

the Commission finds that no one has

proffered any new evidence that

requires the Commission to alter this

finding, and that the 30% limit

complies with the intent of Congress

and satisfies the criteria specified in

section 613.

10. In the Second Order on

Reconsideration, the Commission finds

that the 30% limit adequately constrains

the extent to which either a large cable

MSO acting unilaterally or a group of

cable MSOs acting in concert could

exercise market power in the purchase

of programming to reduce the diversity

of programming or to coerce

nonaffiliated programmers into denying

programming to alternative MVPDs. In

addition, the 30% ceiling limits the

extent to which large cable MSOs can

merge and result in one or two MSOs

controlling local cable markets

nationwide, thereby helping to preserve

opportunities for entry by overbuilders

or other MVPDs and reduce the

likelihood that large MSOs can

coordinate their behavior by mutually

forbearing from overbuilding each

other’s service territories. The

Commission found that the 30% limit

also reduces the likelihood of

coordinated activity between large cable

MSOs in areas such as program

purchasing and equipment purchasing.

Accordingly, in the Second Order on

Reconsideration, the Commission finds

that the 30% limit simultaneously

guards against the potential

anticompetitive effects of horizontal

concentration and allows cable MSOs to

realize the benefits of clustering in order

to gain efficiencies related to economies

of scale and scope in administration,

deployment of new technologies and

services, extension into previously

unserved territories, etc.

11. In the Second Order on

Reconsideration, the Commission also

concludes that the gradual but

continuous growth and expansion in

both cable-affiliated and independent

programming sources and programming

networks over the past several years

tends to suggest that current levels of

horizontal concentration have not

significantly hampered new video

programmers’ entry, and that the

Commission’s 30% limit properly struck

a reasonable balance between

concentration and diversity concerns.

12. With respect to the impact of other

statutory provisions and rules, one

petitioner argued that the Commission’s

reliance in the Second Report and Order

upon existing statutes and regulations to

support the 30% ownership limit was

improper. In the Second Order on

Reconsideration, the Commission finds

that the Second Report and Order

properly considered the impact of other

statutes and regulations, given the

requirements of Section 613 that the

Commission examine the marketplace

as it currently operates. The

Commission finds that statutes and

rules such as the program access,

program carriage, channel occupancy

limits, and must-carry requirements all

affect the way the cable television

industry currently operates and have a

profound effect on current industry

structure and performance. In the

Second Order on Reconsideration, the

Commission finds that, because these

provisions have real and substantive

impact upon the market, the

Commission properly considered the

impact of these provisions in alleviating

some of the public interest and

anticompetitive concerns about

horizontal concentration.

13. In addition to requesting the

lowering of the 30% ownership limit,

petitioners proposed that the
37792 Federal Register / Vol. 63, No. 134 /Tuesday, July 14, 1998 /Rules and Regulations

Commission revise the calculation

factors. One petitioner argued that the

30% limit should include households

served by a telephone company that is

affiliated with an MSO. In the Second

Order on Reconsideration, the

Commission finds that, where the use of

a telephone company’s lines is limited

to the provision of local exchange

services, the telephone company does

not operate as a ‘‘cable system’’ and its

telephone subscribers should not be

counted toward the number of

subscribers served by an MSO affiliated

with the telephone company. Likewise,

the Commission states that the cable

horizontal ownership limit does not

apply to subscribers of a telephone

company that offers multichannel video

programming distribution service solely

through means other than a ‘‘cable

system.’’ However, the Second Order on

Reconsideration emphasizes that

telephone companies offering MVPD

service through cable systems are

subject to the cable horizontal

ownership limits.

14. One petitioner argued that homes

in franchise areas facing ‘‘effective

competition’’ should not be included in

calculating the 30% limit because

horizontal ownership limits are only

required to combat the local monopoly

and ‘‘gatekeeper’’ power of cable

systems, so that the justification for

these limits disappear where local

distribution markets are competitive.

Rejecting this argument in the Second

Order on Reconsideration, the

Commission finds that, had Congress

intended to eliminate all cable

regulations where the ‘‘effective

competition’’ standard applicable to rate

deregulation is satisfied, the ‘‘effective

competition’’ exemption would have

been drawn much more broadly. The

Commission observes that the ‘‘effective

competition’’ standard determines when

there is sufficient local competition to

prevent an incumbent cable operator

from exercising market power in setting

local rates for cable services sold to

local subscribers. In contrast, the

horizontal ownership limit was

designed to ensure that no cable MSO

acquires a sufficiently large share of

subscribers nationwide to exercise

undue market power at the national

level in its purchase of programming

from networks, which generally sell

their programming nationwide. The

Second Order on Reconsideration

concludes that the ‘‘effective

competition’’ exemption is expressly

limited to cable rate regulation and is

not sufficient to address all the concerns

expressed by Congress in enacting

Section 613.

15. In the Second Order on

Reconsideration, a petitioner also

requested that the Commission tighten

its attribution rules by eliminating the

single majority shareholder exception,

which provides that minority interests

will not be attributed where a single

shareholder owns more than 50% of the

outstanding voting stock. The petitioner

argued that this exception to the

attribution rules is ‘‘unduly

mechanistic’’ and ignores the minority

shareholder’s ‘‘ability to influence the

actual operation of the property’’ even

when a majority shareholder is present.

16. In the Second Order on

Reconsideration, the Commission finds

that there was not enough evidence in

this docket to justify eliminating the

single majority shareholder exception.

The single majority shareholder

provision of the rules is currently under

review in the broadcast context in MM

Docket Nos. 94–150, 92–51 and 87–154.

In that proceeding, the Commission

sought comment on the nature of

‘‘influence’’ and ‘‘control’’ and the

connection between equity ownership

and such influence and control. The

Commission is also issuing a Notice of

Proposed Rulemaking seeking comment

on whether and how the cable

attribution rules, including the single

majority shareholder exception, should

be revised. In the Second Order on

Reconsideration, the Commission notes

that its determination regarding the

cable attribution rules applies to both

the horizontal ownership rules and

channel occupancy limits.

17. A motion also was filed with the

Commission to lift the Commission’s

voluntary stay on enforcement of the

cable horizontal ownership rules. In the

Second Report and Order, the

Commission had voluntarily stayed the

effective date of these rules pending

final judicial resolution of the District

Court decision in Daniels that the

underlying statute violates the First

Amendment. While the Daniels Court

had stayed further District Court

proceedings pending interlocutory

appeal of its judgment, it had not

enjoined the Commission from adopting

and enforcing horizontal ownership

rules under the statute. In August 1996,

the D.C. Circuit Court consolidated the

Daniels appeal regarding the facial

validity of the statute and the Time

Warner challenge to the Commission’s

rules, and determined to hold court

proceedings in abeyance while the

Commission reconsidered the horizontal

rules.

18. In the Second Order on

Reconsideration, the Commission

retains the voluntary stay of the 30%

horizontal ownership limit at this time,

in light of the continuing pendency of

the judicial proceedings relating to the

underlying provision. In order to

facilitate monitoring of MSOs’

ownership interests, the Commission

lifts the stay insofar as it applies to the

information submission provisions of 47

CFR 76.503(c) that are applicable when

any person or entity holding an

attributable interest in cable systems

reaching 20% or more of homes passed

nationwide acquires additional cable

systems. The existing rules require a

certification that no violation of the

30% limit will occur as a result of such

acquisition. In the Second Order on

Reconsideration, the Commission finds

that, in light of the continuation of the

stay, the certification should only

specify the incremental change the

acquisition makes in terms of the 30%

of household passed standard, i.e.

specifying the ownership in terms of

homes passed before and after the

acquisition is complete. The Second

Order on Reconsideration also states

that affected parties will be required to

come into compliance with the

horizontal ownership rules within 60

days of the appellate court’s issue of a

mandate upholding section 613(f)(1)(a)

and the rules, unless the Commission

determines as part of this ongoing

proceeding to lift the stay at an earlier

date. Interested parties, including in

particular parties that are now entering

into business arrangements that would

violate the rules but for the existence of

the stay, should be well aware of the

existence of the rules and thus have a

full opportunity to be prepared to

comply with them.

Ordering Clauses

19. Accordingly, it is ordered that the

petitions for reconsideration filed in this

proceeding are denied.

20. It is further ordered that the

Motion to Lift Stay filed December 15,

1993 by the Center for Media Education

and Consumer Federation of America is

granted as to the Commission’s

voluntary stay on enforcement of 47

CFR 76.503(c), and is denied as to the

Commission’s voluntary stay on

enforcement of 47 CFR 76.503(a), (b),

(d), (e) and (f).

List of Subjects in 47 CFR Part 76

Cable television.

Federal Communications Commission.

Magalie Roman Salas,

Secretary.

[FR Doc. 98–18037 Filed 7–13–98; 8:45 am]

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